Archive for September 2007

To say that every Indian is obsessed with the Rupee would really be of no surprise, considering our very material existence depends on the currency that has the Mahatma printed on it. But, of late, there has been surge in the obsession and it is directly proportional to the surge of the Rupee versus the US Dollar. Thus, the rise of the Rupee is a tale that everyone is talking of; right from the mantriji to our business magnates. And yet, something seems to be lost in translation. If you happen to track the Dollar (even for the past few days), it has been falling against all currencies quite like the London Bridge (remember the rhyme, London bridge is falling down…). Thus to be quite honest, it certainly is not strengthening of the Rupee but rather the weakening of the Dollar. Nonetheless, the impact is quite evident on the Indian IT industry, that has been quite dependent on exports from the US. Personally, I feel it is a time for reassessment, a time to get back to the basics and start working from there. Indian IT industry has never really considered the domestic market as a viable proposition. If there were ever a right time, it is right now. And that is what I intend to say in my latest story published in the Dataquest magazine, in which not only did I try to assess the impact on the IT industry, I proposed some solutions (nothing out of the world believe me). Read on.—————————————————————————–The Brighter Side of a Stronger RupeeThere is no denying that a stronger rupee has eaten into the profits of the export services firms in India, sometimes forcing them to take drastic measures. But a strong local currency has a positive impact. Not only can it make imports cheaper, it can force the export-oriented firms to look more seriously at the local market. By all means, the latter has started happening. Will the strong rupee be a blessing for Indias domestic market?

On a balmy May night in 1991, a Swissair Airbus took off from the IGI Airport, New Delhi. It was headed for Zurich, Switzerland. As some of the passengers figured out, there was something special in the cargo. At the airport, there was much heightened security around the cargo-hold and officials seemed unusually nervous and edgy. In its belly, the Swiss aircraft was hauling 20 tonnes of gold from the Indian governments treasury, to be sold in the international marketplace. A news item in the NYT stated that the gold was sold for around $234 mn, priced at $11.7 mn a ton.

Some days later, another 46 tonnes of gold was carted away to the Bank of England, London. But this time, the consignment was drawn from the Reserve Bank of India (RBI) coffers and pledged in return for loans from the Bank of England, and Japan. The hush-hush transaction had been necessitated due to the terrible state of the Indian economy at that point in time.

The situation so was bad that the near-zilch forex reserves were just enough to cover a few weeks of imports, and the country was on the verge of defaulting on loan repayments. At that point, the finance minister, Dr Manmohan Singh could only wring his hands as the gold was moved out of India.

Naturally, as soon as the news leaked, there was uproar throughout India. Gold is more than a precious metal for Indians, it is a sign of prosperity and wellness. People decried the governments decision; many termed it as a sell-out, while others equated it to mortgaging national honor. Indeed, India’s credibility had touched rock bottom, lenders were not willing to loan without gold as a mortgage (that too insisting on moving it physically). At that time, the exchange rate was some 20 rupees to a US dollar.

This ripple (gold reserves transfer), in time, converged into a wave that changed the course of the Indian economy. Under pressure from the International Monetary Fund (IMF), India had to liberalize the economy and open up the markets. The rest, as they say, is history.

Over 16 years have passed since that gold was sold, and so much has changed. Made in India is a tag used with pride and Indian businesses are creating news all over be it steel or tea. Even Indian forex reserves, which had dipped to less than $1 bn in 1991, have crossed the $200 bn mark. With GDP growing at around 9% for the past few years, and massive inflow of FDI, the picture is quite rosy.

An indicator of the same is the Indian Rupee or INR that is appreciating. Today, it stands at around 40 INR to a USD. Yet, not everyone seems to be celebrating. The reasons are not hard to miss.

Little Miss MuffetFor the past decade or so, the IT Industry has been the most estimable sector of the economy. Growing at over 20% per year, the industry, according to Nasscom figures, is set to touch $60 bn by 2010. Much of this growth can be attributed to cost arbitrage. The idea is fairly simple: earn in USD, pay in INR and sing tralalala on your way to the bank. Due to the big differential in value terms (it was 48 INR per USD in 2002), Indian companies were able to sell services much cheaply. And foreigners woke up to outsourcing.

Even so, there was a catch, as Indian companies were riding on a cost plank, the billings were competitive and always under pressure. Meanwhile, due to a spurt on the domestic shore, the costs (most importantly, manpower) were always on the incline. Quite like miss Muffet (the IT players) had been sitting on a tuffet, eating curd and whey, before the spider (price rise) came and sat beside her.

Since 2002, the INR started appreciating, and IT companies were caught in a quandary. With every rise in exchange rate, the margins (almost anorexic) were furthered squeezed. Yet, the companies weathered the situation with fair stoicism. The fact that the government was proselytizing rapid growth and thus giving away tax sops, could have played on the minds. Anyways, there was little noise about the gradual increase in the INR rates.

As the INR continued on its northward trek, some noises were made, now and then, here and there. Steadily, the squeaks became a chorus, and much concern was expressed at the way the currency tide was turning. But when the trek turned to a sprint, the IT industry was wrought with fear. A pall of despondency descended on the sunshine sector, everyone discussed the issue with aggravated disbelief. Doomsday scenarios were plotted. And everyone spoke about how the rise would be the toughest challenge faced by the industry, an uphill battle for survival. Experts proclaimed that the rise of the INR was impacting the competitiveness of Indian players and would lead to companies favoring other locations.

Yet, what everyone seemed to miss was that the rise of the INR was a natural economic phenomenon and, to be correct, was not really a steep rise. It was more a case of USD depreciation (read the box Rupee Up or Dollar Down?).

Time to go D
esiIf there was ever a time to sing the Indian song, it is now. Over the last many decades the IT players have been looking beyond India for growth, nothing bad in that. But in these years, the domestic pie has been increasing steadily. Consider this, according to the DQ20 figures, the domestic IT market has touched Rs 73,315 crore (growing by 27.2%) as IT spreads to B and C tier towns. A good indicator of this has been the fact that during the past year, over 11 lakh notebooks and 49 lakh desktops have been sold.

MR Venkatesh, a CA based in Chennai, and author of many papers on the various economic issues including exchange rate, thumps the table enthusiastically. “I have always believed that there is huge potential in the domestic market, after all, the population of India is greater than the combined population of the US and Europe. It is simply a no-brainer. Now that the INR has strengthened, it makes an even more compelling case,” he says. He talks of how the Indian Railways has made use of technology in a big way not only to increase its efficiency but also to grow revenues. “Like railways, there are many more IT success stories waiting to happen,” he adds.

The process might have already started. Till date, while TCS, Infosys, Wipro, and others were blazing trails overseas, the IBMs and the HPs became huge players on the domestic scene. Thus every big outsourcing deal like TCSs ABN Amro, was matched by IBMs big domestic deals like Bharti and Idea. The MNCs were marching away with the domestic cherries most of the time. Not anymore.

There seems to be a change in the mood now, as players are focusing on the market with renewed zeal. A good illustration would be the latest TCS deal with BSNL, worth over Rs 570 crore. “If players believe that the rupee will continue to appreciate and appreciation is not going to be reversed soon, it may provide an additional incentive to develop the domestic market,” says Alok Ray, former professor of economics, IIM Calcutta, and visiting professor of economics, University of Pittsburgh, USA.

Even the BPO industry is looking inward. Take the case of Intelenet Global, while its international revenues declined due to the tanking of the USD, it has become a power to reckon with on the domestic BPO front. Intelenets acquisition of Sparsh (a domestic BPO) is paying high-dividends as its domestic business grew handsomely and currently accounts for 23% of the total revenues. Thus the dip in the overseas is being offset by the rise in the domestic. So, are other BPO companies like Sitel India turning inward. “The myth that domestic clients do not pay well has been shattered. In fact, domestic companies are ready to pay provided you have a good business case. The demands of the domestic industry are quite like overseas ones,” says Safir Adeni, CEO, Sitel India.

There is more to the desi story though. The process will lead to democritization of IT. The benefits from the IT Industry were transferred to a limited audience, usually in the metros and fairly well-heeled. The common man was largely untouched by the miracle. But as when the markets expand, the growth is bound to be more inclusive. The telecom sector is a brilliant case study. In a few years time, India has turned into a Mecca for all mobile companies and this transition has benefited all. Similarly, as the laptops and routers and servers reach the Indian hinterland, it will create a domino effect.

The Good, the Bad and ImportsNow then, the hardware sector should be on a roll. As India is a net importer in terms of hardware, be it chips or LCDs, the industry benefits the most from the current scenario. Considering that INR has appreciated by over 7% in the past few months, one expects to see big banners proclaiming never-before prices hanging on the roadside. But that has not really been the case.

Indeed, hardware prices have been dropping, but not dropping as suddenly as they should. The suddenness of it all is missing. Could it be that the hardware manufacturers, the smart cookies are pocketing the margins that they are deriving from the rise. Disagrees Vinnie Mehta, executive director, Manufacturers Association for Information Technology (MAIT). “The advantage gained from a stronger INR versus the USD has more or less been nullified by the rise of the Japanese Yen and the Chinese RNB. Since much of the hardware that comes to India is imported from these two destinations, there has really not been that much advantage to talk of,” he says.

Meanwhile, all that Raj Saraf, chairman and MD, Zenith is willing to say is that “the benefits have been passed on to the customer.” Ask why and how much, Saraf is not willing to go into the nitty-gritty. The silence from the hardware industry is a wee-bit surprising. After all, one mans poison is another’s honey. The cheer on the hardware side should have mitigated the gloom on the software side. But that has not been the case so far.

Also, could the INR appreciation impact the evolving manufacturing story? If it is cheaper to import, why manufacture? “I dont think so,” says Mehta, adding, “the attractiveness of the Indian market would not be impacted simply because of its sheer size. Manufacturers are coming to India to tap the domestic market and not due to cost arbitrage or other things.” That is indeed the moot point: the domestic market. The hardware sectors focus (by choice or force) on the domestic industry seems to be paying off finally.

Survival of the FittestAll said and done, the exporting software (read services) needs to reassess and realign the goals. They need to gear up for the changed scenario. As TR Madan Mohan, director, Consulting, ICT Practice, Frost & Sullivan puts it. “Margins of export intensive firms such as BPOs have been adversely affected in the last two quarters. A 1% increase in INR against the USD can impact 70-75 base points for KPO/BPOs and about 35-40 base points on margins of IT companies,” he says.

Volatility is the real devil, points out Ameet Nivsarkar, VP, Nasscom. “While one can learn to live with a gradual rise of currency, it is the sudden one (like the one witnessed in the past few months) that is hard to digest,” he says.

S Gopalikrishnan, CEO, Infosys, echoes the same sentiment. “Rupee appreciated 7% during the first quarter and 9% during the year. It takes time to absorb such a change and is a challenge for the company,” he said. According to him, the company plans to raise its billing rates by 3-4% for new contracts and by 2-3% on renewal of the existing contracts.

But that could be tough, as says Sudin Apte, country head & senior analyst, India Operations, Forrester Research: “First, the margins of Indian IT vendors are affected by INRs rise against the USD. In the quarter ending June 2007, the rupee appreciated almost 7% and this has hit their profitability. In addition, Indian IT exporters claim that their revenues have gone down, while costs have risen. Our research based on (IT Vendors) client interactions indicates that some of the Indian IT-ITeS companies are trying to raise prices to cope with the situation and are asking their North American clients to share some of the risks. Moreover, the bigger Indian vendors are exploring a pricing model with some of their clients that would maintain a base-level convertibility and assured returns in dollars. But we don t see a very positive reaction to this by their clients,” he states candidly.

Apte has a solution for the industry as well. “To negate the impact I advise Indian IT companies to look beyond just pushing up the utilization because there are limits as to wh
at extent firms can raise utilization. Raising it a few points further may not be the solution as the results are limited. So these firms have to take other initiatives such as enhance efforts for non-linearity; further flatten the delivery pyramid by using process IP and automation of several managerial tasks (that are manual at present); and boost front-end sophistication, for instance, firms like TCS and Infosys have made reasonable strides in this regard, most other firms need to upgrade skills related to sales, relationship management, account management, negotiations, standardization of sales process among others,” he says.

Also, as the INR is more or less stable in comparison to other currencies, it makes sense to look for greener shores namely in the Europe, and other places. “It is always a good long-term policy to diversify your markets for reducing risks, irrespective of short-term fluctuations in exchange rates. It should be easier, given our past successes and the good brand image and reputation that some Indian IT companies have already built up,” says Ray.

Don’t forget that with INR rise acquisitions become cheaper as well. As Indian companies look to spread far and wide, a strong currency will surely be of help and servicing the loans taken earlier would be easier.

Big Squeeze on Small VendorsWhile the big players have been able to tide over the crisis, it is the small ones that have been feeling the heat. Caught between the devil and the deep sea, i.e, lesser revenue and high costs (as they don’t have the economies of scale), IT SMEs do not seem that sure anymore. According to experts, they need to do the same things like their bigger cousins, namely increase productivity and diversify, except they have a lesser margin for error.

“Apart from these initiatives, for smaller vendors, the time has arrived to identify their strengths and focus on just one or two lines where they can provide services instead of spreading too thin,” adds Apte.

Nivsarkar also talks about the numerous initiatives taken by Nasscom to help the SMEs diversify. “We are actively promoting new locations for our SMEs and running quite a few country programs,” he says.

It is deja vu for the Indian IT industry. When the Al Qaeda had rocked the world in September 11, 2001, there were talks of a US meltdown and the resultant impact on the world economy. Then too, the Indian IT Industry was under the scanner due to its exposure to the US economy. But nothing of that happened, on the contrary, Indian companies grew and benefited.

The INR appreciation (the minor that is there) is a sign of times to come; an indication of India’s growing economic stature. In 1991, we had to pledge our gold to foreign banks and take loans from the IMF. Just 12 years later, in 2003, India became a lender to the IMF, contributing some 180 mn to a reserve fund used to bail out countries in a financial mess. India also wrote off 12.5 mn that seven heavily indebted poor countries Mozambique, Tanzania, Zambia, Guyana, Nicaragua, Ghana and Uganda owed to us! Prime minister Manmohan Singh must be surely rubbing his hands in glee now.

In light of such positive changes, it is but natural that currency will appreciate and should. There has been much speculation of another fall in USD due to the messy situation of the US economy, a mammoth trade deficit and rising unemployment rates. But no one is ready to stick his neck out to guess when and by how much will the hallowed USD fall. “When and how is a million dollar question with a billion dollar implications,” says Venkatesh. IT players just need to stop cribbing and realign their focus. The mantra is simple; go desi and go now!

As far as the currency conundrum is concerned, the only advice that one can give to the industry captains, is the one governess Miss Prism gave to Cecily in Oscar Wilde’s ‘Importance of Being Earnest’ written in 1890s. Albeit, with a minor change.

“That would be delightful. Cecily, you will read your Political Economy in my absence. The chapter on the Fall (read RISE) of the Rupee you may omit. It is somewhat too sensational.”

That’s the story of the “rise of the rupee”. Somewhat too sensational. The reality may be different.

Amidst the reports and panic about the “rising rupee”, the real picture may have got fuzzy. While it is true that the INR has appreciated against the dollar to record levels over the past one year, and now hovers at INR 40 to a USD, the fact is: so have most other currencies, including the Euro, gained against the US dollar. Little googling reveals something not so startling. The INR may have gone up in comparison to the USD, but so have most others. Thus, effectively, the INR has maintained its level against most other currencies (that have let market forces determine the rate). Hence, the real issue is not that the INR is appreciating, but that the USD is depreciating. This minor wordplay betrays the bigger implications.

SaysVenkatesh. “Quite many have been barking up the wrong tree because almost all world currencies, barring a few like Yen, have appreciated in comparison to the USD. It has been a global phenomenon. The rise of the INR is an economic phenomenon; as the economy becomes stronger so does the currency. But the current spurt should be referred to as the dollar depreciation rather than merely a rupee appreciation. In this light, I do not really think Indian exporters have much to complain about,” he says.

Not quite says Nivsarkar. “While the USD has indeed depreciated on a global scale, the INR has also appreciated quite reasonably due to the huge inflow of foreign investments into the Indian economy. Thus, it is a blend of both the factors,” he states.

So lets rake up some dust on this matter. In 2002, according to data available from RBI, 1 USD was equal to 48.59 INR; 1 GBP was equal to 73 INR and 1 euro was equal to 45.92 INR. As of today (according to XE.com), 1 USD is equal to 40.35 INR; 1 GBP is equal to 81.91 INR and 1 euro is equal to 56.11 INR. Thus, over the last 5 years, INR depreciated against the euro and the UK pound, while going up against the USD.

Again, the reasons are not hard to fathom. Over the last few years, the US economy has been going through a meltdown. Economic growth has been tardy and has been beset with crises, like the latest meltdown in the sub-prime lending market. In fact, according to a report published on BBC today, “The USD has fallen to a record low against the euro as investors bet that the Federal Reserve will cut interest rates to help the economy.

By late afternoon in Europe, it took $1.3901 to buy a euro, passing the last record of $1.3852 set on 24 July.” QED, it is the USD that is going down and not the INR going up. Hence, the glass might seem half empty, but is half full as well. The USD has dropped against most currencies. While that may affect the cost savings accrued to Ameriocan companies, there is little change in the attractiveness of any specific offshore location

***Attrition Blues!

It is Catch 22 for the IT giants in India. On one hand, the margins are being squeezed, on the other, they need to pay more to retain the workforce. There have been signs that at least the big companies are resisting wage hikes, namely, TCS, Wipro, and Infosys. In fact, in the recently announced Salary Survey conducted by Dataquest a
nd IDC, Infosys ranked at #12 and TCS at #13, in the top paymasters in 2007.

Result, rising attrition. According to a report published by PTI, the big four, namely, TCS, Infosys, Wipro and Satyam have seen an exodus of about 10,000 people in the first quarter. Though these firms have been rapidly hiring, they collectively hired more than 25,000 employees in the April-June period, the net addition was just about 16,300taking their total headcount to 2,85,357 employees.

Most of these employees seem to be leaving due to the lure of greenback, thus joining MNCs and smaller firms that are ready to pay higher. If there is any further strengthening of the rupee, great salary hikes (average salary growth of 11% and average salary hike 19%, according to DQ-IDC Survey) might be a thing of the past. Already there has been talk of how the wage hikes are becoming unrealistic, and currently forms one of the biggest components of the operational costs. The good news is that salary satisfaction is not really linked to salary hikes and much of this attrition can be controlled by imaginative HR strategies. A lot of small players seem to have learnt that and are finding newer ways of retaining their employees, rather than just trying to pay them more.

***Call it the revenge of the native!

The chart shows the movement of stock/ADR prices of selected IT Services firms. Is offshoring falling out of favour with the American investors in the wake of a weakening dollar?After enjoying immense favor with the investors, thanks to their impressive growth rates and margins for more than four years, the leading offshore service providers saw their stocks plummeting in the last six months, thanks to a weakening dollar that gave rise to fears about the sustainability of offshoring economics.

Between March (23rd) and September (7th), the price of Infosys ADR dropped 9.6% while that of fellow Bangalore company, Wipro, dropped 15.7%. But the most drastic fall was seen by the stock of “growth machine,” Cognizant which plunged by a whopping 23.5%.

In the same time period, the traditional North American outsourcing firms like IBM, Accenture and CSC saw their stock prices going up by 21.6%, 9.9% and 5.6% respectively.

The Indian firms like Infosys, Wipro and TCS (not listed in the US) have admitted that the weakening dollar has hit their margins.

Meanwhile, the North American firms have built significant India delivery capability and are fast mastering the art of managing talent in a highly competitive labor market like India, as revealed by a Dataquest-IDC survey. This has leveled the offshoring battlefield further, and that has certainly not helped the cause of investor confidence in Indian firms.

To say that every Indian is obsessed with the Rupee would really be of no surprise, considering our very material existence depends on the currency that has the Mahatma printed on it. But, of late, there has been surge in the obsession and it is directly proportional to the surge of the Rupee versus the US Dollar. Thus, the rise of the Rupee is a tale that everyone is talking of; right from the mantriji to our business magnates. And yet, something seems to be lost in translation. If you happen to track the Dollar (even for the past few days), it has been falling against all currencies quite like the London Bridge (remember the rhyme, London bridge is falling down…). Thus to be quite honest, it certainly is not strengthening of the Rupee but rather the weakening of the Dollar. Nonetheless, the impact is quite evident on the Indian IT industry, that has been quite dependent on exports from the US. Personally, I feel it is a time for reassessment, a time to get back to the basics and start working from there. Indian IT industry has never really considered the domestic market as a viable proposition. If there were ever a right time, it is right now. And that is what I intend to say in my latest story published in the Dataquest magazine, in which not only did I try to assess the impact on the IT industry, I proposed some solutions (nothing out of the world believe me). Read on.—————————————————————————–The Brighter Side of a Stronger RupeeThere is no denying that a stronger rupee has eaten into the profits of the export services firms in India, sometimes forcing them to take drastic measures. But a strong local currency has a positive impact. Not only can it make imports cheaper, it can force the export-oriented firms to look more seriously at the local market. By all means, the latter has started happening. Will the strong rupee be a blessing for Indias domestic market?

On a balmy May night in 1991, a Swissair Airbus took off from the IGI Airport, New Delhi. It was headed for Zurich, Switzerland. As some of the passengers figured out, there was something special in the cargo. At the airport, there was much heightened security around the cargo-hold and officials seemed unusually nervous and edgy. In its belly, the Swiss aircraft was hauling 20 tonnes of gold from the Indian governments treasury, to be sold in the international marketplace. A news item in the NYT stated that the gold was sold for around $234 mn, priced at $11.7 mn a ton.

Some days later, another 46 tonnes of gold was carted away to the Bank of England, London. But this time, the consignment was drawn from the Reserve Bank of India (RBI) coffers and pledged in return for loans from the Bank of England, and Japan. The hush-hush transaction had been necessitated due to the terrible state of the Indian economy at that point in time.

The situation so was bad that the near-zilch forex reserves were just enough to cover a few weeks of imports, and the country was on the verge of defaulting on loan repayments. At that point, the finance minister, Dr Manmohan Singh could only wring his hands as the gold was moved out of India.

Naturally, as soon as the news leaked, there was uproar throughout India. Gold is more than a precious metal for Indians, it is a sign of prosperity and wellness. People decried the governments decision; many termed it as a sell-out, while others equated it to mortgaging national honor. Indeed, India’s credibility had touched rock bottom, lenders were not willing to loan without gold as a mortgage (that too insisting on moving it physically). At that time, the exchange rate was some 20 rupees to a US dollar.

This ripple (gold reserves transfer), in time, converged into a wave that changed the course of the Indian economy. Under pressure from the International Monetary Fund (IMF), India had to liberalize the economy and open up the markets. The rest, as they say, is history.

Over 16 years have passed since that gold was sold, and so much has changed. Made in India is a tag used with pride and Indian businesses are creating news all over be it steel or tea. Even Indian forex reserves, which had dipped to less than $1 bn in 1991, have crossed the $200 bn mark. With GDP growing at around 9% for the past few years, and massive inflow of FDI, the picture is quite rosy.

An indicator of the same is the Indian Rupee or INR that is appreciating. Today, it stands at around 40 INR to a USD. Yet, not everyone seems to be celebrating. The reasons are not hard to miss.

Little Miss MuffetFor the past decade or so, the IT Industry has been the most estimable sector of the economy. Growing at over 20% per year, the industry, according to Nasscom figures, is set to touch $60 bn by 2010. Much of this growth can be attributed to cost arbitrage. The idea is fairly simple: earn in USD, pay in INR and sing tralalala on your way to the bank. Due to the big differential in value terms (it was 48 INR per USD in 2002), Indian companies were able to sell services much cheaply. And foreigners woke up to outsourcing.

Even so, there was a catch, as Indian companies were riding on a cost plank, the billings were competitive and always under pressure. Meanwhile, due to a spurt on the domestic shore, the costs (most importantly, manpower) were always on the incline. Quite like miss Muffet (the IT players) had been sitting on a tuffet, eating curd and whey, before the spider (price rise) came and sat beside her.

Since 2002, the INR started appreciating, and IT companies were caught in a quandary. With every rise in exchange rate, the margins (almost anorexic) were furthered squeezed. Yet, the companies weathered the situation with fair stoicism. The fact that the government was proselytizing rapid growth and thus giving away tax sops, could have played on the minds. Anyways, there was little noise about the gradual increase in the INR rates.

As the INR continued on its northward trek, some noises were made, now and then, here and there. Steadily, the squeaks became a chorus, and much concern was expressed at the way the currency tide was turning. But when the trek turned to a sprint, the IT industry was wrought with fear. A pall of despondency descended on the sunshine sector, everyone discussed the issue with aggravated disbelief. Doomsday scenarios were plotted. And everyone spoke about how the rise would be the toughest challenge faced by the industry, an uphill battle for survival. Experts proclaimed that the rise of the INR was impacting the competitiveness of Indian players and would lead to companies favoring other locations.

Yet, what everyone seemed to miss was that the rise of the INR was a natural economic phenomenon and, to be correct, was not really a steep rise. It was more a case of USD depreciation (read the box Rupee Up or Dollar Down?).

Time to go DesiIf there was ever a time to sing the Indian song, it is now. Over the last many decades the IT players have been looking beyond India for growth, nothing bad in that. But in these years, the domestic pie has been increasing steadily. Consider this, according to the DQ20 figures, the domestic IT market has touched Rs 73,315 crore (growing by 27.2%) as IT spreads to B and C tier towns. A good indicator of this has been the fact that during the past year, over 11 lakh notebooks and 49 lakh desktops have been sold.

MR Venkatesh, a CA based in Chennai, and author of many papers on the various economic issues including exchange rate, thumps the table enthusiastically. “I have always believed that there is huge potential in the domestic market, after all, the population of India is greater than the combined population of the US and Europe. It is simply a no-brainer. Now that the INR has strengthened, it makes an even more compelling case,” he says. He talks of how the Indian Railways has made use of technology in a big way not only to increase its efficiency but also to grow revenues. “Like railways, there are many more IT success stories waiting to happen,” he adds.

The process might have already started. Till date, while TCS, Infosys, Wipro, and others were blazing trails overseas, the IBMs and the HPs became huge players on the domestic scene. Thus every big outsourcing deal like TCSs ABN Amro, was matched by IBMs big domestic deals like Bharti and Idea. The MNCs were marching away with the domestic cherries most of the time. Not anymore.

There seems to be a change in the mood now, as players are focusing on the market with renewed zeal. A good illustration would be the latest TCS deal with BSNL, worth over Rs 570 crore. “If players believe that the rupee will continue to appreciate and appreciation is not going to be reversed soon, it may provide an additional incentive to develop the domestic market,” says Alok Ray, former professor of economics, IIM Calcutta, and visiting professor of economics, University of Pittsburgh, USA.

Even the BPO industry is looking inward. Take the case of Intelenet Global, while its international revenues declined due to the tanking of the USD, it has become a power to reckon with on the domestic BPO front. Intelenets acquisition of Sparsh (a domestic BPO) is paying high-dividends as its domestic business grew handsomely and currently accounts for 23% of the total revenues. Thus the dip in the overseas is being offset by the rise in the domestic. So, are other BPO companies like Sitel India turning inward. “The myth that domestic clients do not pay well has been shattered. In fact, domestic companies are ready to pay provided you have a good business case. The demands of the domestic industry are quite like overseas ones,” says Safir Adeni, CEO, Sitel India.

There is more to the desi story though. The process will lead to democritization of IT. The benefits from the IT Industry were transferred to a limited audience, usually in the metros and fairly well-heeled. The common man was largely untouched by the miracle. But as when the markets expand, the growth is bound to be more inclusive. The telecom sector is a brilliant case study. In a few years time, India has turned into a Mecca for all mobile companies and this transition has benefited all. Similarly, as the laptops and routers and servers reach the Indian hinterland, it will create a domino effect.

The Good, the Bad and ImportsNow then, the hardware sector should be on a roll. As India is a net importer in terms of hardware, be it chips or LCDs, the industry benefits the most from the current scenario. Considering that INR has appreciated by over 7% in the past few months, one expects to see big banners proclaiming never-before prices hanging on the roadside. But that has not really been the case.

Indeed, hardware prices have been dropping, but not dropping as suddenly as they should. The suddenness of it all is missing. Could it be that the hardware manufacturers, the smart cookies are pocketing the margins that they are deriving from the rise. Disagrees Vinnie Mehta, executive director, Manufacturers Association for Information Technology (MAIT). “The advantage gained from a stronger INR versus the USD has more or less been nullified by the rise of the Japanese Yen and the Chinese RNB. Since much of the hardware that comes to India is imported from these two destinations, there has really not been that much advantage to talk of,” he says.

Meanwhile, all that Raj Saraf, chairman and MD, Zenith is willing to say is that “the benefits have been passed on to the customer.” Ask why and how much, Saraf is not willing to go into the nitty-gritty. The silence from the hardware industry is a wee-bit surprising. After all, one mans poison is another’s honey. The cheer on the hardware side should have mitigated the gloom on the software side. But that has not been the case so far.

Also, could the INR appreciation impact the evolving manufacturing story? If it is cheaper to import, why manufacture? “I dont think so,” says Mehta, adding, “the attractiveness of the Indian market would not be impacted simply because of its sheer size. Manufacturers are coming to India to tap the domestic market and not due to cost arbitrage or other things.” That is indeed the moot point: the domestic market. The hardware sectors focus (by choice or force) on the domestic industry seems to be paying off finally.

Survival of the FittestAll said and done, the exporting software (read services) needs to reassess and realign the goals. They need to gear up for the changed scenario. As TR Madan Mohan, director, Consulting, ICT Practice, Frost & Sullivan puts it. “Margins of export intensive firms such as BPOs have been adversely affected in the last two quarters. A 1% increase in INR against the USD can impact 70-75 base points for KPO/BPOs and about 35-40 base points on margins of IT companies,” he says.

Volatility is the real devil, points out Ameet Nivsarkar, VP, Nasscom. “While one can learn to live with a gradual rise of currency, it is the sudden one (like the one witnessed in the past few months) that is hard to digest,” he says.

S Gopalikrishnan, CEO, Infosys, echoes the same sentiment. “Rupee appreciated 7% during the first quarter and 9% during the year. It takes time to absorb such a change and is a challenge for the company,” he said. According to him, the company plans to raise its billing rates by 3-4% for new contracts and by 2-3% on renewal of the existing contracts.

But that could be tough, as says Sudin Apte, country head & senior analyst, India Operations, Forrester Research: “First, the margins of Indian IT vendors are affected by INRs rise against the USD. In the quarter ending June 2007, the rupee appreciated almost 7% and this has hit their profitability. In addition, Indian IT exporters claim that their revenues have gone down, while costs have risen. Our research based on (IT Vendors) client interactions indicates that some of the Indian IT-ITeS companies are trying to raise prices to cope with the situation and are asking their North American clients to share some of the risks. Moreover, the bigger Indian vendors are exploring a pricing model with some of their clients that would maintain a base-level convertibility and assured returns in dollars. But we don t see a very positive reaction to this by their clients,” he states candidly.

Apte has a solution for the industry as well. “To negate the impact I advise Indian IT companies to look beyond just pushing up the utilization because there are limits as to what extent firms can raise utilization. Raising it a few points further may not be the solution as the results are limited. So these firms have to take other initiatives such as enhance efforts for non-linearity; further flatten the delivery pyramid by using process IP and automation of several managerial tasks (that are manual at present); and boost front-end sophistication, for instance, firms like TCS and Infosys have made reasonable strides in this regard, most other firms need to upgrade skills related to sales, relationship management, account management, negotiations, standardization of sales process among others,” he says.

Also, as the INR is more or less stable in comparison to other currencies, it makes sense to look for greener shores namely in the Europe, and other places. “It is always a good long-term policy to diversify your markets for reducing risks, irrespective of short-term fluctuations in exchange rates. It should be easier, given our past successes and the good brand image and reputation that some Indian IT companies have already built up,” says Ray.

Don’t forget that with INR rise acquisitions become cheaper as well. As Indian companies look to spread far and wide, a strong currency will surely be of help and servicing the loans taken earlier would be easier.

Big Squeeze on Small VendorsWhile the big players have been able to tide over the crisis, it is the small ones that have been feeling the heat. Caught between the devil and the deep sea, i.e, lesser revenue and high costs (as they don’t have the economies of scale), IT SMEs do not seem that sure anymore. According to experts, they need to do the same things like their bigger cousins, namely increase productivity and diversify, except they have a lesser margin for error.

“Apart from these initiatives, for smaller vendors, the time has arrived to identify their strengths and focus on just one or two lines where they can provide services instead of spreading too thin,” adds Apte.

Nivsarkar also talks about the numerous initiatives taken by Nasscom to help the SMEs diversify. “We are actively promoting new locations for our SMEs and running quite a few country programs,” he says.

It is deja vu for the Indian IT industry. When the Al Qaeda had rocked the world in September 11, 2001, there were talks of a US meltdown and the resultant impact on the world economy. Then too, the Indian IT Industry was under the scanner due to its exposure to the US economy. But nothing of that happened, on the contrary, Indian companies grew and benefited.

The INR appreciation (the minor that is there) is a sign of times to come; an indication of India’s growing economic stature. In 1991, we had to pledge our gold to foreign banks and take loans from the IMF. Just 12 years later, in 2003, India became a lender to the IMF, contributing some 180 mn to a reserve fund used to bail out countries in a financial mess. India also wrote off 12.5 mn that seven heavily indebted poor countries Mozambique, Tanzania, Zambia, Guyana, Nicaragua, Ghana and Uganda owed to us! Prime minister Manmohan Singh must be surely rubbing his hands in glee now.

In light of such positive changes, it is but natural that currency will appreciate and should. There has been much speculation of another fall in USD due to the messy situation of the US economy, a mammoth trade deficit and rising unemployment rates. But no one is ready to stick his neck out to guess when and by how much will the hallowed USD fall. “When and how is a million dollar question with a billion dollar implications,” says Venkatesh. IT players just need to stop cribbing and realign their focus. The mantra is simple; go desi and go now!

As far as the currency conundrum is concerned, the only advice that one can give to the industry captains, is the one governess Miss Prism gave to Cecily in Oscar Wilde’s ‘Importance of Being Earnest’ written in 1890s. Albeit, with a minor change.

“That would be delightful. Cecily, you will read your Political Economy in my absence. The chapter on the Fall (read RISE) of the Rupee you may omit. It is somewhat too sensational.”

That’s the story of the “rise of the rupee”. Somewhat too sensational. The reality may be different.

Amidst the reports and panic about the “rising rupee”, the real picture may have got fuzzy. While it is true that the INR has appreciated against the dollar to record levels over the past one year, and now hovers at INR 40 to a USD, the fact is: so have most other currencies, including the Euro, gained against the US dollar. Little googling reveals something not so startling. The INR may have gone up in comparison to the USD, but so have most others. Thus, effectively, the INR has maintained its level against most other currencies (that have let market forces determine the rate). Hence, the real issue is not that the INR is appreciating, but that the USD is depreciating. This minor wordplay betrays the bigger implications.

SaysVenkatesh. “Quite many have been barking up the wrong tree because almost all world currencies, barring a few like Yen, have appreciated in comparison to the USD. It has been a global phenomenon. The rise of the INR is an economic phenomenon; as the economy becomes stronger so does the currency. But the current spurt should be referred to as the dollar depreciation rather than merely a rupee appreciation. In this light, I do not really think Indian exporters have much to complain about,” he says.

Not quite says Nivsarkar. “While the USD has indeed depreciated on a global scale, the INR has also appreciated quite reasonably due to the huge inflow of foreign investments into the Indian economy. Thus, it is a blend of both the factors,” he states.

So lets rake up some dust on this matter. In 2002, according to data available from RBI, 1 USD was equal to 48.59 INR; 1 GBP was equal to 73 INR and 1 euro was equal to 45.92 INR. As of today (according to XE.com), 1 USD is equal to 40.35 INR; 1 GBP is equal to 81.91 INR and 1 euro is equal to 56.11 INR. Thus, over the last 5 years, INR depreciated against the euro and the UK pound, while going up against the USD.

Again, the reasons are not hard to fathom. Over the last few years, the US economy has been going through a meltdown. Economic growth has been tardy and has been beset with crises, like the latest meltdown in the sub-prime lending market. In fact, according to a report published on BBC today, “The USD has fallen to a record low against the euro as investors bet that the Federal Reserve will cut interest rates to help the economy.

By late afternoon in Europe, it took $1.3901 to buy a euro, passing the last record of $1.3852 set on 24 July.” QED, it is the USD that is going down and not the INR going up. Hence, the glass might seem half empty, but is half full as well. The USD has dropped against most currencies. While that may affect the cost savings accrued to Ameriocan companies, there is little change in the attractiveness of any specific offshore location

***Attrition Blues!

It is Catch 22 for the IT giants in India. On one hand, the margins are being squeezed, on the other, they need to pay more to retain the workforce. There have been signs that at least the big companies are resisting wage hikes, namely, TCS, Wipro, and Infosys. In fact, in the recently announced Salary Survey conducted by Dataquest and IDC, Infosys ranked at #12 and TCS at #13, in the top paymasters in 2007.

Result, rising attrition. According to a report published by PTI, the big four, namely, TCS, Infosys, Wipro and Satyam have seen an exodus of about 10,000 people in the first quarter. Though these firms have been rapidly hiring, they collectively hired more than 25,000 employees in the April-June period, the net addition was just about 16,300taking their total headcount to 2,85,357 employees.

Most of these employees seem to be leaving due to the lure of greenback, thus joining MNCs and smaller firms that are ready to pay higher. If there is any further strengthening of the rupee, great salary hikes (average salary growth of 11% and average salary hike 19%, according to DQ-IDC Survey) might be a thing of the past. Already there has been talk of how the wage hikes are becoming unrealistic, and currently forms one of the biggest components of the operational costs. The good news is that salary satisfaction is not really linked to salary hikes and much of this attrition can be controlled by imaginative HR strategies. A lot of small players seem to have learnt that and are finding newer ways of retaining their employees, rather than just trying to pay them more.

***Call it the revenge of the native!

The chart shows the movement of stock/ADR prices of selected IT Services firms. Is offshoring falling out of favour with the American investors in the wake of a weakening dollar?After enjoying immense favor with the investors, thanks to their impressive growth rates and margins for more than four years, the leading offshore service providers saw their stocks plummeting in the last six months, thanks to a weakening dollar that gave rise to fears about the sustainability of offshoring economics.

Between March (23rd) and September (7th), the price of Infosys ADR dropped 9.6% while that of fellow Bangalore company, Wipro, dropped 15.7%. But the most drastic fall was seen by the stock of “growth machine,” Cognizant which plunged by a whopping 23.5%.

In the same time period, the traditional North American outsourcing firms like IBM, Accenture and CSC saw their stock prices going up by 21.6%, 9.9% and 5.6% respectively.

The Indian firms like Infosys, Wipro and TCS (not listed in the US) have admitted that the weakening dollar has hit their margins.

Meanwhile, the North American firms have built significant India delivery capability and are fast mastering the art of managing talent in a highly competitive labor market like India, as revealed by a Dataquest-IDC survey. This has leveled the offshoring battlefield further, and that has certainly not helped the cause of investor confidence in Indian firms.

Getting to interact with Prof. Brandenburg was really a high-point for me. It was not only because he is renowned as the ‘father of the MP3’ (which he disputes), but also for the person he is, a true academic genius. I really admire the values that Prof. Brandenburg stands for. A few decades back, the fledgling IT industry was dominated by people who were inventors, people like Gary Kildall, Gene Amdahl, Seymour Kray, Bob Kahn, Vincent Cerf, and so many others. Today, it is mainly dominated by business magnates (Yes, there is Steve Jobs and one could argue even Bill Gates, still). In those days, inventors tinkered with technology not for the money that could be made out of it, but how it would aid people in their everyday lives. Prof. Brandenburg belongs to that genre, he was instrumental in inventing MP3, and once he had done so, he returned to Fraunhofer Institute to aid other people. When during the conversation, I talked about money and compared him with Sir. Tim Berners-Lee, he baulked and said that he had made money (thanks to a German legislation) from his invention and he seemed quite content with it. His simplicity is truly touching.

Brandenburg (and his team of inventors) invented the Motion Picture Experts Group (MPEG) Audio Layer 3, more popularly known by the file extension MP3, at the Fraunhofer Institute in Germany in the early nineties. It was on July 7, 1994, that the Fraunhofer Society released the first software MP3 encoder called l3enc. And it completely changed the way we looked at and heard music. All of sudden, music had turned portable; it could be played anywhere and was more or less freely available. Over the next few years, MP3 completely lorded over all the music formats that existed in the past and the present.

But instead of basking in the glory of his invention, or raking in money by the millions, Brandenburg decided to return to Fraunhofer as the director of the Institute for Digital Media Technology (IDMT) in the picturesque town of Ilmenau, Germany. He now enjoys simple pleasures of life like listening to music on his iPod Nano, swimming or trekking.

Widely regarded as the father of MP3, Brandenburg is currently working on futuristic technologies in the same domain, like a program that automatically discerns and unearths music based on the type of music that we listen to from the Internet. In an interview with Dataquest, Brandenburg talks about his invention and himself. Excerpts.

It has been around thirteen years since the MP3 format was publicly launched, and yet it continues to be the most popular format for music. In this rapidly changing world isnt that a sort an anomaly?I think MP3 is a common ground for compressed music; it is one format that is supported by all kinds of equipment and can be decoded and listened to anytime, anywhere. People like this continuity; they dont want to change the format of their music every other year. It is due to this universitality that MP3 continues to be popular.

MP3 is the second most popular search item on the Internet, and, ironically, it wasnt even invented keeping the computer in mind. Did you have an inkling of how popular it would be?Yes and no. One always has dreams, when I did my PHD work, I was dreaming that my work would be used by millions of people. But I dont think I or anybody else in the group had a feeling of how large our work would really be.

How do you feel about the marriage between Internet and MP3?In was in late 1994 and early 1995, that we at Fraunhofer had an internal discussion about the future potential of the Internet. We knew that we had a window of opportunity to make MP3 the Internet audio standard. Quite shortly after we released the shareware encoder and decoder software, we saw the first people using MP3 on the Internetthat was in 1995.

How does it feel to be referred to as the father of MP3?I am certainly not the father of MP3. I know who else contributed in the development of MP3, whose shoulders I stand on and who else worked on the topic. Hence, I never refer to myself as the father of MP3, I do know that I contributed significantly to the development of the standard, so feel very connected to the MP3, thats it.

Your views on MP3 and P2P servicesdo you not think that like any other commodity, users have a right to share and trade music?I always had the opinion that IP should be treated with respect. A musician, and others in the creative process, should benefit from their creation, so I didnt like the idea of Napster. That does not mean I endorse every move and idea of the music industry. I do think, there should be a chance for musicians to make money from their creation, while others continue to enjoy music.

The music industry seems to hate MP3, do you think their fears are justified?Justified to an extent, but highly exaggerated. In fact, this exaggeration became a problem by itself. They feared MP3 and would not embrace it, and it took a long time for legal services to come up. Internet provided lots of opportunities for lesser-known musicians. It is important that websites like Myspace and others provide a way for these artists to showcase their talents. The music industry did not capitalize on this opportunity.

What do you think of DRM? Should there be some sort of protection for MP3 files?MP3 by itself is a format that plays everywhere and a blank MP3 does not have any sort of protection. Though I do understand that people do want some sort of protection. But having multiple proprietary systems that do not work with each other complicated things. It was a bad idea. DRM should work in a way that as a customer you should not notice it. If you are a legal customer, you should do whatever you are entitled to with your music without getting into any difficulties. For instance, if your computer breaks down or you have to replace files from another computer, or if you have different brands of devices, so on. All the current problems we have with DRM is bad in terms of usability.

Ideally, DRM should not be visible at all to the consumers and as long as we dont have that, it is better to have no DRM (the current multiple format one) at all.

What do you think of the numerous patent disputes that have arisen over the use of MP3?Some of these issues have been very bad for the industry and the population, as commercial interests have driven them. As nowadays, everybody tries to get in and make quick money. Patents themselves are a good idea. I cant comment on any specific legal dispute. But it is clear that a lot of things have happened that make us all worried as to what the future will be.

There is often the discussion about your own personal gains, you could have benefited a lot more. Does that thought ever occur to you?Thats a frequently asked question. But then, I have indeed benefited commercially from MP3. I am holding one patent that is about to run out, and am on a number of patents that Fraunhofer Institute holds. In Germany, there is a law that the inventor gets a fraction of the revenues generated from royalties so not only me but also a lot of others get a share from the royalties, as well. There are a lot of patents and lot of people who contributed to MP3, so it is a win-win situation.

What do you think of the current generation of MP3 players, do you feel they are good enough?There is always more to come. What I think we will see is more of connectivity, like it will get easier to connect to my computer to get music. What I would like to see, and we are working currently at Ilmenau, is an automatic play list generator. Even when companies have done a lot in improving the user interface, I still have to search for what I need to listen to next. The MP3 player or the iPod could help with that selection. Otherwise, I really like the current breed of MP3 players.

What do you think of the iPod?It is quite good. I own a couple of iPods and other MP3 players as well.

How many MP3 players do you own?I must have bought close to 15-20 MP3 players over the years. At the moment, I use my 8 GB Nano, but I recently bought Samsung, and have several Creative Labs players.

What is the future of MP3?On one hand you have the AAC format. We worked quite a bit on AAC as well. We all at Fraunhofer are proud of what became of AAC. My colleagues are also working at MPEG surround and MP3 surround. I think for audio in general, we will see a big step forward beyond the current surround systems. The current systems are based on ideas that have been around for over two decades. We are now working on it and calling it Ozono, there you can have immersive audio, you feel like you are somewhere out with much better sound quality. It gives you a much better idea of surrounding, of being somewhere else versus 2-channel or 5-channel audio.

You have also been involved with a program called Soundslike, what is the progress on it?Work on Soundslike has been continuing. The original Soundslike did not work that well, the newer version discerns music patterns and helps with the selection of music. If I understand right, we can see the first products incorporating Soundslike to be out this year. It would be some PC software product.

A lot of people have argued against the idea, saying that an algorithm can hardly choose music?The debate is quite interesting. True it is difficult for machines to understand all the different nuances and finally decide for me whether I like the music or not, and generate a play list. There are a lot of Web 2.0 technologies involved in this, like sharing play lists, doing the metadata, synthesizing the style, etc. In the future, we will have a combination of those, the automatic system will help us in a limited way. I heard reports that on testing, people enjoyed it a lot. It is intuitive, wont be cent percent right. But it will work enough so that it can help in the selection process.

What other projects are you involved with?I am now the head of the institute in Ilmenau and am responsible for all the activities here. In many ways life has come full circle; two decades back I was working on audio compression, now my job is to look around for what could be interesting, and work out the money and people issues.

MP3 is not a very fancy name, did the team think of any other name at that time?We just needed a 3-letter extension, because that was the time of the Windows 3.1 OS and the file extension could not be more than three letters. Others had in fact used the term MP2 for layer 2 music. If I recall correctly it was the Internet Underground Music Archive that already had music in Layer 2 format. So we had an internal discussion on what extension to take and then it was just a file extension. Little did we realize that this file extension would be used as a generic name for the whole technology. It wasnt a conscious decision by us, we always referred to the technology as MPEG Layer 3, and only later on started to use the term MP3, after the term had gained popularity.

What do you feel about MP3 and open source?MP3 on one hand is a patented technology but its source was available for free for a long time. We do support the idea of open source and feel that it is a good idea. But that does not make MP3 free in terms of no strings attached because it still is patented technology. Of course, I did watch what was happening with Ogg Vorbis and so on, and, overall, I think for the whole of the software industry and the whole of the Internet culture it is a good thing if we have both. We need a world where people cooperate without commercial interests. I think it is a very nice model, but things would not work if it were the only model. We need a free software and free technology model as well as companies investing money and resources to do work, apply for licenses and patents and work on proprietary technology. In the end, if both systems co-exist it will be of advantage to all.

It has been 13 years, how much longer will it stay with us?MP3 will stay the common denominator; it will continue to be the format for a lot of different equipment for the next ten years at least. What will happen after that is hard to guess. Over the past years, more bandwidth and more storage capacity has been available to us, so you could have newer formats for multi-channel sound. It will be very interesting. Will it be MP3 Surround for portable devices or will we go for different format altogether, is anybodys guess. But, for the next 10 years while there will be new systems, MP3 will co-exist and be alive.

Getting to interact with Prof. Brandenburg was really a high-point for me. It was not only because he is renowned as the ‘father of the MP3’ (which he disputes), but also for the person he is, a true academic genius. I really admire the values that Prof. Brandenburg stands for. A few decades back, the fledgling IT industry was dominated by people who were inventors, people like Gary Kildall, Gene Amdahl, Seymour Kray, Bob Kahn, Vincent Cerf, and so many others. Today, it is mainly dominated by business magnates (Yes, there is Steve Jobs and one could argue even Bill Gates, still). In those days, inventors tinkered with technology not for the money that could be made out of it, but how it would aid people in their everyday lives. Prof. Brandenburg belongs to that genre, he was instrumental in inventing MP3, and once he had done so, he returned to Fraunhofer Institute to aid other people. When during the conversation, I talked about money and compared him with Sir. Tim Berners-Lee, he baulked and said that he had made money (thanks to a German legislation) from his invention and he seemed quite content with it. His simplicity is truly touching.

Brandenburg (and his team of inventors) invented the Motion Picture Experts Group (MPEG) Audio Layer 3, more popularly known by the file extension MP3, at the Fraunhofer Institute in Germany in the early nineties. It was on July 7, 1994, that the Fraunhofer Society released the first software MP3 encoder called l3enc. And it completely changed the way we looked at and heard music. All of sudden, music had turned portable; it could be played anywhere and was more or less freely available. Over the next few years, MP3 completely lorded over all the music formats that existed in the past and the present.

But instead of basking in the glory of his invention, or raking in money by the millions, Brandenburg decided to return to Fraunhofer as the director of the Institute for Digital Media Technology (IDMT) in the picturesque town of Ilmenau, Germany. He now enjoys simple pleasures of life like listening to music on his iPod Nano, swimming or trekking.

Widely regarded as the father of MP3, Brandenburg is currently working on futuristic technologies in the same domain, like a program that automatically discerns and unearths music based on the type of music that we listen to from the Internet. In an interview with Dataquest, Brandenburg talks about his invention and himself. Excerpts.

It has been around thirteen years since the MP3 format was publicly launched, and yet it continues to be the most popular format for music. In this rapidly changing world isnt that a sort an anomaly?I think MP3 is a common ground for compressed music; it is one format that is supported by all kinds of equipment and can be decoded and listened to anytime, anywhere. People like this continuity; they dont want to change the format of their music every other year. It is due to this universitality that MP3 continues to be popular.

MP3 is the second most popular search item on the Internet, and, ironically, it wasnt even invented keeping the computer in mind. Did you have an inkling of how popular it would be?Yes and no. One always has dreams, when I did my PHD work, I was dreaming that my work would be used by millions of people. But I dont think I or anybody else in the group had a feeling of how large our work would really be.

How do you feel about the marriage between Internet and MP3?In was in late 1994 and early 1995, that we at Fraunhofer had an internal discussion about the future potential of the Internet. We knew that we had a window of opportunity to make MP3 the Internet audio standard. Quite shortly after we released the shareware encoder and decoder software, we saw the first people using MP3 on the Internetthat was in 1995.

How does it feel to be referred to as the father of MP3?I am certainly not the father of MP3. I know who else contributed in the development of MP3, whose shoulders I stand on and who else worked on the topic. Hence, I never refer to myself as the father of MP3, I do know that I contributed significantly to the development of the standard, so feel very connected to the MP3, thats it.

Your views on MP3 and P2P servicesdo you not think that like any other commodity, users have a right to share and trade music?I always had the opinion that IP should be treated with respect. A musician, and others in the creative process, should benefit from their creation, so I didnt like the idea of Napster. That does not mean I endorse every move and idea of the music industry. I do think, there should be a chance for musicians to make money from their creation, while others continue to enjoy music.

The music industry seems to hate MP3, do you think their fears are justified?Justified to an extent, but highly exaggerated. In fact, this exaggeration became a problem by itself. They feared MP3 and would not embrace it, and it took a long time for legal services to come up. Internet provided lots of opportunities for lesser-known musicians. It is important that websites like Myspace and others provide a way for these artists to showcase their talents. The music industry did not capitalize on this opportunity.

What do you think of DRM? Should there be some sort of protection for MP3 files?MP3 by itself is a format that plays everywhere and a blank MP3 does not have any sort of protection. Though I do understand that people do want some sort of protection. But having multiple proprietary systems that do not work with each other complicated things. It was a bad idea. DRM should work in a way that as a customer you should not notice it. If you are a legal customer, you should do whatever you are entitled to with your music without getting into any difficulties. For instance, if your computer breaks down or you have to replace files from another computer, or if you have different brands of devices, so on. All the current problems we have with DRM is bad in terms of usability.

Ideally, DRM should not be visible at all to the consumers and as long as we dont have that, it is better to have no DRM (the current multiple format one) at all.

What do you think of the numerous patent disputes that have arisen over the use of MP3?Some of these issues have been very bad for the industry and the population, as commercial interests have driven them. As nowadays, everybody tries to get in and make quick money. Patents themselves are a good idea. I cant comment on any specific legal dispute. But it is clear that a lot of things have happened that make us all worried as to what the future will be.

There is often the discussion about your own personal gains, you could have benefited a lot more. Does that thought ever occur to you?Thats a frequently asked question. But then, I have indeed benefited commercially from MP3. I am holding one patent that is about to run out, and am on a number of patents that Fraunhofer Institute holds. In Germany, there is a law that the inventor gets a fraction of the revenues generated from royalties so not only me but also a lot of others get a share from the royalties, as well. There are a lot of patents and lot of people who contributed to MP3, so it is a win-win situation.

What do you think of the current generation of MP3 players, do you feel they are good enough?There is always more to come. What I think we will see is more of connectivity, like it will get easier to connect to my computer to get music. What I would like to see, and we are working currently at Ilmenau, is an automatic play list generator. Even when companies have done a lot in improving the user interface, I still have to search for what I need to listen to next. The MP3 player or the iPod could help with that selection. Otherwise, I really like the current breed of MP3 players.

What do you think of the iPod?It is quite good. I own a couple of iPods and other MP3 players as well.

How many MP3 players do you own?I must have bought close to 15-20 MP3 players over the years. At the moment, I use my 8 GB Nano, but I recently bought Samsung, and have several Creative Labs players.

What is the future of MP3?On one hand you have the AAC format. We worked quite a bit on AAC as well. We all at Fraunhofer are proud of what became of AAC. My colleagues are also working at MPEG surround and MP3 surround. I think for audio in general, we will see a big step forward beyond the current surround systems. The current systems are based on ideas that have been around for over two decades. We are now working on it and calling it Ozono, there you can have immersive audio, you feel like you are somewhere out with much better sound quality. It gives you a much better idea of surrounding, of being somewhere else versus 2-channel or 5-channel audio.

You have also been involved with a program called Soundslike, what is the progress on it?Work on Soundslike has been continuing. The original Soundslike did not work that well, the newer version discerns music patterns and helps with the selection of music. If I understand right, we can see the first products incorporating Soundslike to be out this year. It would be some PC software product.

A lot of people have argued against the idea, saying that an algorithm can hardly choose music?The debate is quite interesting. True it is difficult for machines to understand all the different nuances and finally decide for me whether I like the music or not, and generate a play list. There are a lot of Web 2.0 technologies involved in this, like sharing play lists, doing the metadata, synthesizing the style, etc. In the future, we will have a combination of those, the automatic system will help us in a limited way. I heard reports that on testing, people enjoyed it a lot. It is intuitive, wont be cent percent right. But it will work enough so that it can help in the selection process.

What other projects are you involved with?I am now the head of the institute in Ilmenau and am responsible for all the activities here. In many ways life has come full circle; two decades back I was working on audio compression, now my job is to look around for what could be interesting, and work out the money and people issues.

MP3 is not a very fancy name, did the team think of any other name at that time?We just needed a 3-letter extension, because that was the time of the Windows 3.1 OS and the file extension could not be more than three letters. Others had in fact used the term MP2 for layer 2 music. If I recall correctly it was the Internet Underground Music Archive that already had music in Layer 2 format. So we had an internal discussion on what extension to take and then it was just a file extension. Little did we realize that this file extension would be used as a generic name for the whole technology. It wasnt a conscious decision by us, we always referred to the technology as MPEG Layer 3, and only later on started to use the term MP3, after the term had gained popularity.

What do you feel about MP3 and open source?MP3 on one hand is a patented technology but its source was available for free for a long time. We do support the idea of open source and feel that it is a good idea. But that does not make MP3 free in terms of no strings attached because it still is patented technology. Of course, I did watch what was happening with Ogg Vorbis and so on, and, overall, I think for the whole of the software industry and the whole of the Internet culture it is a good thing if we have both. We need a world where people cooperate without commercial interests. I think it is a very nice model, but things would not work if it were the only model. We need a free software and free technology model as well as companies investing money and resources to do work, apply for licenses and patents and work on proprietary technology. In the end, if both systems co-exist it will be of advantage to all.

It has been 13 years, how much longer will it stay with us?MP3 will stay the common denominator; it will continue to be the format for a lot of different equipment for the next ten years at least. What will happen after that is hard to guess. Over the past years, more bandwidth and more storage capacity has been available to us, so you could have newer formats for multi-channel sound. It will be very interesting. Will it be MP3 Surround for portable devices or will we go for different format altogether, is anybodys guess. But, for the next 10 years while there will be new systems, MP3 will co-exist and be alive.

One of the biggest faced by governments across the globe battling terror is money laundering. How to stop the funding and transfer of funds to terror outfits? Post 9/11, a lot of measures have been put into force to curb the transactions. All these actions are labelled as Anti-Money Laundering or AML. Recently there were reports of how sleeping cells in Germany and Canada were recieving money through Internet. In fact, Internet has become a favored means for surreptiously sending across money by terrorist outfits. AML is a war, rather an ongoing war. And the biggest weapon that the governments have with them is technology. By using IT extensively, money laundering can be curbed to a great extent. Indian authorities have also woken up to AML and are trying to put in place the strategy, it is an uphill task. I had authored a story on the issue, and it was published in CIOL. Thought, I’d share the same….——————————————————————————Battling terror by choking financeSeveral countries are in the process of implementing anti money laundering measures to fight off the evil of terrorism. Where does India stand? An analysis.

One hot summer morning in June, 2000, Mohammed Atta and his close associate Marwan al-Shehhi sauntered into the Florida SunTrust Bank and opened a joint account with few and forged documents. Just a few months ago, Atta and al-Shehhi had opened accounts in Citibank and HSBC’s Dubai branches, respectively. Over the summer, approximately $109,440 was wired into their account from their U.A.E. bank accounts. According to FBI, the deposits to their bank account totaled $303,481.63 in over a year. This money was used for airline tickets, flying lessons, living expenses, etc. The whole operation culminated on the morning of September 11, 2001, when Atta crashed the American Airlines Flight 11 Boeing 767-223ER aircraft in the North Tower of the World Trade Center. And the world woke up to terrorism, and the evil known as money laundering.

Post 9/11, U.S. came down stringently on money laundering, trying to eradicate the financial sources was an important objective of America’s war on terror. To that end, numerous legislations were promulgated; in the U.S. it was the Patriot Act, while the European Commission set up the Financial Action Task Force (FATF) recommendations and the Wolfsberg Principles on Private Banking. “The FATF has a set of forty recommendations which are updated on a consistent basis to keep pace with money laundering techniques. The FATF membership now includes 31+ countries with some countries from the Gulf Council as permanent members,” says Hanuman Tripathi, MD, Infrasoft.

It is certainly not an easy task, as the criminals try and stay one step ahead of the legal dragnet. And technology is on their side. With the boom in Internet banking and online transactions, fraudulent funds can be transferred at click of the mouse. Premjit Dass, associate director (Advisory), Forensic Services, KPMG, estimates that close to $590 billion to $1.5 trillion are laundered annually, “When viewed in the context of the global GDP, it is a very large amount,” he points out.

But the authorities are trying to catch up, with the use of technology, especially software. Major banks across the developed countries have put in to place anti money laundering (AML) processes; these could range from appointing an officer to installation of an enterprise wide software solution.

In the Indian context, money laundering has always been a big problem. Hawala and black money economy are the two big issues that have plagued the various regulatory authorities over the years. Black economy according to estimates was around 40% of GDP in 1995-96, (Source: The Black Economy in India, author Arun Kumar). “Few can realistically estimate the dramatic amount of wealth locked out of the Indian economy and the myriad means through which is seeks legitimacy,” says Suheim Sheikh, managing director, SDG & head (Capital Market & Anti Money Laundering Solutions), 3i Infotech.

Ironically, money laundering has never been considered a serious issue in India, it is often deemed as a legitimate mean to save money from the tax department. All that seems to be changing now, with the Reserve Bank of India (RBI) and the government coming down heavily on money launderers and trying to get to the very roots of these activities.

The Prevention of Money Laundering Act 2002 has come into effect from July 1, 2005. The RBI has issued KYC (know your consumer) guidelines to banks that were needed to implement by December 31, 2005, but many Indian banks are still in the process of implementing these guidelines. “SEBI (Securities and Exchange Bureau of India) has also issued AML guidelines to stock brokers vide its notification ISD/CIR/RR/AML/1/06 dated January 18, 2006. A FIU or Financial Intelligence Unit has also become operational,” adds Premjit.

According to source at Indian Bank Association, the format for the KYC feedback forum is still being discussed.

To help banks and financial institutions keep track of fraudulent transactions, many IT firms have developed enterprise level AML software. “AML software is essentially a pattern recognition and behavior detection technology. It is largely comprised of a KYC and transaction monitoring modules,” says Hanuman. Simply speaking, if there are constant transactions of big amounts of money, the system will alert the bank and it could then keep a tab. Were, this system in place in 2001, the big transactions made by Atta and al-Shehhi would have alerted the authorities. The software has the ability to categorize the customer from a risk-based perspective. The bank customers are a worried lot though, as the authorities will be watching and recording every transaction.

Indian IT companies are vying to grab a chunk of the global anti money laundering that is estimated to be worth around $10 billion, whereas the Indian market is estimated to be worth around Rs. 185-220 crores. Companies like Infrasoft and SDG-3i Infotech are the leading players in the domestic space. While most of the multinational banks have or are in the process of implementing AML processes, it is the nationalized banks that seem to be dragging their feet.

There are many reasons as to why public sector banks are lacking in comparison to private ones, chiefly because they have much larger number of branches situated in far-flung areas that are difficult to connect and they also have a complex decision making process.

“The MNC banks have an additional advantage since they have had to implement their group AML standards as they fall under the purview of the regulators in the home jurisdictions that have had AML legislation and rules and regulations for a number of years,” adds Premjit. Banks like Vijaya Bank, UTI Bank, Karnataka Bank, Canara Bank have all implemented AML systems.

Indian IT firms are also making a foray into the Middle East and South Asia markets and looking at garnering a major share. Meanwhile, companies like TCS, Iflex, Infosys, etc. are also looking at tweaking their core-banking solutions, so as to be able to deliver AML features.Finally, will the stopping the cash flow really make an impact on global terrorism?

The answer is unequivocally yes. Nothing works like money, if these terror groups are deprived of their legitimate finances, they will be unable to carry out any major attacks. It isn’t a coincidence that with the imple
mentations of these measures, U.S. has become a lot safer and hopefully there never will be another 9/11.

One of the biggest faced by governments across the globe battling terror is money laundering. How to stop the funding and transfer of funds to terror outfits? Post 9/11, a lot of measures have been put into force to curb the transactions. All these actions are labelled as Anti-Money Laundering or AML. Recently there were reports of how sleeping cells in Germany and Canada were recieving money through Internet. In fact, Internet has become a favored means for surreptiously sending across money by terrorist outfits. AML is a war, rather an ongoing war. And the biggest weapon that the governments have with them is technology. By using IT extensively, money laundering can be curbed to a great extent. Indian authorities have also woken up to AML and are trying to put in place the strategy, it is an uphill task. I had authored a story on the issue, and it was published in CIOL. Thought, I’d share the same….——————————————————————————Battling terror by choking financeSeveral countries are in the process of implementing anti money laundering measures to fight off the evil of terrorism. Where does India stand? An analysis.

One hot summer morning in June, 2000, Mohammed Atta and his close associate Marwan al-Shehhi sauntered into the Florida SunTrust Bank and opened a joint account with few and forged documents. Just a few months ago, Atta and al-Shehhi had opened accounts in Citibank and HSBC’s Dubai branches, respectively. Over the summer, approximately $109,440 was wired into their account from their U.A.E. bank accounts. According to FBI, the deposits to their bank account totaled $303,481.63 in over a year. This money was used for airline tickets, flying lessons, living expenses, etc. The whole operation culminated on the morning of September 11, 2001, when Atta crashed the American Airlines Flight 11 Boeing 767-223ER aircraft in the North Tower of the World Trade Center. And the world woke up to terrorism, and the evil known as money laundering.

Post 9/11, U.S. came down stringently on money laundering, trying to eradicate the financial sources was an important objective of America’s war on terror. To that end, numerous legislations were promulgated; in the U.S. it was the Patriot Act, while the European Commission set up the Financial Action Task Force (FATF) recommendations and the Wolfsberg Principles on Private Banking. “The FATF has a set of forty recommendations which are updated on a consistent basis to keep pace with money laundering techniques. The FATF membership now includes 31+ countries with some countries from the Gulf Council as permanent members,” says Hanuman Tripathi, MD, Infrasoft.

It is certainly not an easy task, as the criminals try and stay one step ahead of the legal dragnet. And technology is on their side. With the boom in Internet banking and online transactions, fraudulent funds can be transferred at click of the mouse. Premjit Dass, associate director (Advisory), Forensic Services, KPMG, estimates that close to $590 billion to $1.5 trillion are laundered annually, “When viewed in the context of the global GDP, it is a very large amount,” he points out.

But the authorities are trying to catch up, with the use of technology, especially software. Major banks across the developed countries have put in to place anti money laundering (AML) processes; these could range from appointing an officer to installation of an enterprise wide software solution.

In the Indian context, money laundering has always been a big problem. Hawala and black money economy are the two big issues that have plagued the various regulatory authorities over the years. Black economy according to estimates was around 40% of GDP in 1995-96, (Source: The Black Economy in India, author Arun Kumar). “Few can realistically estimate the dramatic amount of wealth locked out of the Indian economy and the myriad means through which is seeks legitimacy,” says Suheim Sheikh, managing director, SDG & head (Capital Market & Anti Money Laundering Solutions), 3i Infotech.

Ironically, money laundering has never been considered a serious issue in India, it is often deemed as a legitimate mean to save money from the tax department. All that seems to be changing now, with the Reserve Bank of India (RBI) and the government coming down heavily on money launderers and trying to get to the very roots of these activities.

The Prevention of Money Laundering Act 2002 has come into effect from July 1, 2005. The RBI has issued KYC (know your consumer) guidelines to banks that were needed to implement by December 31, 2005, but many Indian banks are still in the process of implementing these guidelines. “SEBI (Securities and Exchange Bureau of India) has also issued AML guidelines to stock brokers vide its notification ISD/CIR/RR/AML/1/06 dated January 18, 2006. A FIU or Financial Intelligence Unit has also become operational,” adds Premjit.

According to source at Indian Bank Association, the format for the KYC feedback forum is still being discussed.

To help banks and financial institutions keep track of fraudulent transactions, many IT firms have developed enterprise level AML software. “AML software is essentially a pattern recognition and behavior detection technology. It is largely comprised of a KYC and transaction monitoring modules,” says Hanuman. Simply speaking, if there are constant transactions of big amounts of money, the system will alert the bank and it could then keep a tab. Were, this system in place in 2001, the big transactions made by Atta and al-Shehhi would have alerted the authorities. The software has the ability to categorize the customer from a risk-based perspective. The bank customers are a worried lot though, as the authorities will be watching and recording every transaction.

Indian IT companies are vying to grab a chunk of the global anti money laundering that is estimated to be worth around $10 billion, whereas the Indian market is estimated to be worth around Rs. 185-220 crores. Companies like Infrasoft and SDG-3i Infotech are the leading players in the domestic space. While most of the multinational banks have or are in the process of implementing AML processes, it is the nationalized banks that seem to be dragging their feet.

There are many reasons as to why public sector banks are lacking in comparison to private ones, chiefly because they have much larger number of branches situated in far-flung areas that are difficult to connect and they also have a complex decision making process.

“The MNC banks have an additional advantage since they have had to implement their group AML standards as they fall under the purview of the regulators in the home jurisdictions that have had AML legislation and rules and regulations for a number of years,” adds Premjit. Banks like Vijaya Bank, UTI Bank, Karnataka Bank, Canara Bank have all implemented AML systems.

Indian IT firms are also making a foray into the Middle East and South Asia markets and looking at garnering a major share. Meanwhile, companies like TCS, Iflex, Infosys, etc. are also looking at tweaking their core-banking solutions, so as to be able to deliver AML features.Finally, will the stopping the cash flow really make an impact on global terrorism?

The answer is unequivocally yes. Nothing works like money, if these terror groups are deprived of their legitimate finances, they will be unable to carry out any major attacks. It isn’t a coincidence that with the implementations of these measures, U.S. has become a lot safer and hopefully there never will be another 9/11.

Radio Frequency Identification or RFID, has been in news for past many years but yet it remains an enigma. Walmart popularized the tags and entreprises were promised manna, freedom from manual tracking, from the manufacturing floor to the warehouse. Well, the picture might not be as rosy, things have been moving on the ground. For instance, DHL has been a big case, using RFID tags to track the parcels. There is still a lot in store on that front. Sometime back, I had interacted with Krish Mantripada, from SAP. He is evangelizing the use of RFID and is well-known for his work on the same. The interaction was published on CIOL.*************************

RFID has been around for quite sometime, but has been creating news in the past few years only, all thanks to retail giant Wallmart. A few years back, Wallmart decided to automate all its back-end processes. Supply chain management or SCM was the biggest challenge, especially if you consider Wallmart vendors are based all across from Shenzen to San Francisco. Wallmart readily adopted RFID, using it to track its goods, manage inventory, business intelligence, etc. Today, it has become a poster boy for RFID deployment. The technology is slowly making a mark on the Indian landscape as well. The early adopters were suppliers to international retail giants like Wallmart, etc. Now, Indian companies are also actively evaluating the deployment of RFID on a mass scale. SAP offers a quite a few integrated ERP solutions that are RFID enabled. Krish Mantripada, Director, Global Solution Strategy, RFID, SCM Solutions Management, SAP, spoke to Shashwat Chaturvedi from CyberMedia News at the recently held SAP Summit about the latest on RFID and his projections about the future. Excerpts.

RFID has often been associated with the retail space only, though it promises to do a lot more. Do you think the perception is changing?Indeed it is. With increasing RFID adoption, enterprises are becoming more and more aware about the possibilities that this technology presents. Currently more than 16 different industry verticals are actively using RFID, from the manufacturing to pharmaceutical. Even, a lot of governments are employing the technology for tracking and identification; pretty soon U.S. passports will carry RFID tags. While it started off as a great retail industry tool, RFID has become much bigger now.

RFID was termed as expensive, especially due to the prohibitive costs of the tags, has that changed?The price for the tags have come down drastically, currently they are hovering in the 10-15 cents (U.S.) per tag bracket. Sometime ago, the cost was around 50 cents. As the adoption spreads, the economies of scale will bring the cost further down. Also, there has been a lot of innovation; some companies are testing polymer-based tags instead of silicon. One firm is also testing paper-based tags with the use of conductive inks.

Why has the Indian markets been largely untouched by the RFID revolution?It is steadily changing; a lot of enterprises are evincing keen interest in the technology. It is really surprising about how much people are aware about RFID. In fact many firms are actively pursuing pilot projects. Indian markets would no longer be untouched by the revolution.Are you working with Indian companies on an RFID implementation?A few leading companies are currently in the early stages of implementation. Will be unable to share precise details as of now.

From which sector do these clients hail from? Is it retail only?It is retail and manufacturing both.

Has SAP also tied up with any company in India for RFID?We have tied up with TCS and Infosys as system integrators; there are more such partnerships in the offing.

Isn’t it strange, that while retail is the key driver behind the RFID adoption, SAP does not have a major client in this space?But we are actively working with all the retail majors. Consider this, a majority of Wallmart and Home Depot suppliers are SAP customers. We are catering to the RFID ecosystem.There has also been talk about the emergence of RFID viruses, your views.Yes like every other technological innovation, there will be mala fide users who will try to misuse it. Similarly, counterchecks are evolving for RFID as well, like firewalls, etc. that will detect malicious behavior and take preventive actions. As we learn more and more, so will the protective measures evolve.

Finally, what are innovative uses of RFID technology?There are just so many, take for instance, in California, I just drive through the Expressways, while the tollbooths capture the data with the use of RFID tag and send me a monthly bill. Some hospitals are talking about tagging their patients with RFID, to ensure that correct medicine is given to the correct patient. As mentioned earlier, a few countries are talking about RFID tagged passports. Chinese authorities in Shanghai, used RFID to track slaughtered pigs. Pharma companies are trying to curb counterfeit products with the help of RFID. In fact, Nokia has come out with a few handsets that enable RFID authentication. The application of RFID is only limited by your imagination.